Cannabis investing is a long-term game. Savvy investors understand that investing in cannabis stocks requires a high tolerance for risk. Cannabis stocks performed poorly in 2022, and this year has not been kind either. However, the industry is rapidly expanding as more countries, along with more U.S. states, legalize cannabis and the potential market grows. According to Allied Market Research, the global cannabis market is expected to grow at an annual rate of 20% until 2031.  

However, it's a highly competitive and volatile market, and only stable and profitable companies with disciplined growth strategies are likely to survive. Massachusetts-based Curaleaf Holdings (CURLF) has been a dominant force in this space, but can it keep its winning streak going? The first-quarter results of the multi-state operator (MSO) offer some clues.

What is going right for Curaleaf?

Curaleaf leads the cannabis industry in the U.S., with $1.3 billion in total revenue reported for 2022. While most MSOs have struggled to grow their revenues in recent quarters, Curaleaf's top line increased 14% year over year to $336 million in the first quarter of 2023.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped by 4% year over year to $71 million. The company's profitability is suffering due to an oversaturated U.S. market, which has driven cannabis prices lower.

However, some things may still go well for the company. Florida, where it currently has 60 stores, could be a strong market for it. The state has not legalized cannabis for recreational use, but developments are ongoing. Florida is a limited-license state where only a few cannabis companies are allowed to operate, so Curaleaf would benefit from its strong established position there if the market were allowed to expand. It currently has 152 stores in 19 states.

Management is also bullish on international growth over the next three years as legalization spreads across Europe, where it operates as Curaleaf International. According to a Reportlinker report, the European cannabis market could grow at a compound annual rate of 61% to reach a value of $14 billion by 2028.

Curaleaf's international revenue jumped 53% year over year to $12.5 million. Management anticipates generating $50 million to $60 million in free cash flow in 2023.

What could go wrong for Curaleaf?

Though it was able to grow revenue even in the current difficult environment, Curaleaf is still not profitable. In the first quarter, its net loss increased to $54 million, up from $36 million in the prior-year period.

Between 2019 and 2021, Curaleaf achieved rapid growth solely through acquisitions. Its purchases included cannabis operators and brands such as Select, Curaleaf NJ, Blue Kudu, Remedy, and Grassroots. That expansion strategy aided it until oversupply put the whole cannabis market under pressure.

Aurora Cannabis, Curaleaf's Canadian counterpart, did something similar. During the expansion of the Canadian cannabis market, it went on an acquisition spree that left it with a heavily burdened balance sheet. It is still suffering the consequences

Curaleaf is working to achieve profitability by closing underperforming facilities in California, Colorado, and Oregon, and cutting costs elsewhere. Meanwhile, it is also rapidly expanding nationwide. In the last year, it has opened 26 stores.

Curaleaf had $116 million in cash on the books at the end of Q1, and $593.8 million in outstanding debt after deducting unamortized debt discounts. 

Cannabis is still illegal in the U.S. at the federal level, and the SAFE Banking Act has repeatedly been stalled in Congress, so obtaining capital remains difficult for marijuana growers. Raising capital through secondary stock offerings becomes the last resort in such a scenario, though that dilutes the positions of prior shareholders.

CURLF Debt to Equity Ratio Chart
CURLF Debt to Equity Ratio data by YCharts.

The company has a debt-to-equity ratio of about 0.49, which is quite high. A lower ratio, on the other hand, would indicate that a company is not relying heavily on debt to survive or to expand. 

Unless Curaleaf starts making profits, repaying its debt will become more difficult. Rapid expansion does not appear to be a good idea right now. If management isn't cautious, market headwinds could undermine the fundamental business they have worked so hard to build.

Curaleaf doesn't look too expensive, with a price-to-sales ratio of 1.5. It remains a good long-term option for investors with a very high-risk appetite who can wait for the company to achieve profitability as the cannabis market grows.